Low chance of a perfect storm but ...
By Nouriel Roubini
The global economy this year will exhibit some similarities with the conditions that prevailed in the last.
No surprise there: We face another year in which global growth will average about 3 per cent, but with a multi-speed recovery — a sub-par, below-trend annual rate of 1 per cent in the advanced economies, and close-to-trend rates of 5 per cent in emerging markets. But there will be some important differences as well.
Painful deleveraging — less spending and more saving to reduce debt and leverage — remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just the euro zone periphery and the United Kingdom.
Indeed, austerity is spreading to the core of the euro zone, the United States and other advanced economies (with the exception of Japan). Given synchronised fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.
With growth anaemic in most advanced economies, the rally in risky assets that began in the second half of last year has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks — the European Central Bank (ECB), the US Federal Reserve, the Bank of England and the Swiss National Bank — have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed towards more unconventional policies by Prime Minister Shinzo Abe’s new government.
FISCAL CLIFFHANGER II
Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law).